By Brendan Conway

Bronte Capital fund manager John Hemptondid just the thing a smart investor should: Identify a hypothesis. Try to falsify it. Let your findings reshape the hypothesis — up to and including throwing it out completely, if that’s what the data supports.

Also plausible, if the hypothesis is true: There should be scads of failed Herbalife distributors attempting to sell their product glut at steep discounts on sites such as eBay and Craigslist.

From Hempton:

If I found lots of desperate distributors – failed ones – selling it on Ebay then Bill Ackman is probably right. If there are no such people then Bill Ackman is wrong. Simple test. And I can do it for any city or country in the world from my desk at home. For example I could use a proxy server and log into Ebay in France and test there. Which is what I did. …

[The Chicago Craigslist Herbalife listing] is a grand total of six people, five of whom present as small time failed customer/distributors and one of whom is trolling for business as a continuing distributor. The small-time distributors have some opened product (as in I started this diet and it was not for me).

I have done this test for many cities – and I simply have not found the level of distress. However if you go to a city with a large Hispanic population you find a lot of adverts. Los Angeles has many but almost all of them are continuing distributors wanting to sell products. …

I looked and looked. Honestly I did. And I could find no evidence of large sales at distress – the sort of sales that would happen if there were 50 thousand tonnes per year build up of unsold inventory in the hands of “failed distributors”.

And so we have it. Bill Ackman had a thesis. I calculated the implications of that thesis (distress selling on Ebay and Craigs List). This observation did not accord with reality.

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JULY 24, 2013 11:47 A.M.

Former Herbalife Leader wrote:

That's because they mask the Herbalife products behind generic advertisements. For every ad that uses Herbalife in the advertisement, there are many more that are selling it, as well.

JULY 24, 2013 11:49 A.M.

Former Herbalife Leader wrote:

Also, not sure which ebay you're looking at ... but Herbalife returned about 6,000 ads when i looked at it. And this is AGAINST Herbalife policy. They ban you for selling on ebay. Therefore, these are distributors that either are looking to sell excess inventory since they're no longer a distributor OR they're looking to leave the business since they know it's against the bylaws.

JULY 24, 2013 1:02 P.M.

reneporcile.blogspot.com wrote:

Wouldn't you think that Ackman could have - at the very least, found at least 1000 HLF distributors to illustrate his point? For crying out loud, he shorted $1 billion of the stock! Given all of your assumptions finding 1000 failed distributors to show the world should be easy. Show us how much each one of them lost. It wasn't done because it can't be done.

Shorts explain why, when surveyed, 87% of FORMER Distributors would recommend Herbalife products to friends and family, and 63% of former Distributors would recommend becoming an Herbalife Distributor.
Go to slide 47 here to see my reference... http://bit.ly/12WKL8E

As far as the laws being broken - the FTC has NOT been asleep. In fact, they recently closed down a MLM company without any press pressure or Ackman, etc...

JULY 24, 2013 1:05 P.M.

Rene Porcile wrote:

Wouldn't you think that Ackman could have - at the very least, found at least 1000 HLF distributors to illustrate his point? For crying out loud, he shorted $1 billion of the stock! Given all of your assumptions finding 1000 failed distributors to show the world should be easy. Show us how much each one of them lost. It wasn't done because it can't be done.

Shorts explain why, when surveyed, 87% of FORMER Distributors would recommend Herbalife products to friends and family, and 63% of former Distributors would recommend becoming an Herbalife Distributor.
Go to slide 47 here to see my reference... http://bit.ly/12WKL8E

As far as the laws being broken - the FTC has NOT been asleep. In fact, they recently closed down a MLM company without any press pressure or Ackman, etc...

JULY 24, 2013 1:21 P.M.

Dist since 1985 wrote:

I was a customer first.in 1985. Lot's of negative press at the time. THE PRODUCTS worked. So I became a dist. My co works and family and friends wanted the products also. So that how I started with retail. And they also got results. So I then had their testimonials. I worked Herbalife for 8 yrs while working at my reg job at the Supermarket. Got to retire from the market around 1992. I have over 1 million in personal volume in Herbalife. and 85% of it was retail customers. They picked up at the house ,or I delivered Later on I shipped out by UPS. and also direct ship from the company. I was able to take care of my youngest Son with severe mental illness. I add this because it was because I was working from home I was able to move to a State that had better services for him. Thank God For Herbalife

JULY 24, 2013 3:27 P.M.

Network Marketing Works if you work it wrote:

Dist since 1985 - Great post. Ackman should have interviewed the many people like yourself who have had a lifestyle change through network marketing. Your story of taking care of your son should be an inspiration for many. There are a lot of great MLM companies that have an impact on thousands of people. Some, who are living their dreams. All while MOST people working in traditional corporate America are living nightmares and retiring broke.

JULY 24, 2013 7:33 P.M.

astute reader wrote:

I just did a search for Herbalife in McAllen TX, which has a very large hispanic population. Is it surprising that there are a little less than two posts per day trying to sell HLF products? I think Hempton is immensely naive. The bulk of his post creates a straw man.

reneporcile.blogspot.com, in Herbalife regardless of whether you are interested in the business opportunity or just buying the product at a discount you are called a DISTRIBUTOR. There were no survey results specifically showing the responses from failed sales leaders only, of which Herbalife's own data suggests there have been close to 2 million since the company started.

JULY 25, 2013 7:23 A.M.

CURRENT LEADER wrote:

Hello 80% done outside USA !

JULY 25, 2013 10:09 A.M.

Horse ofadifferentcolor wrote:

Just as I thought. Bell Ackman operates more from emotion and lust for a fast buck than from a critical analysis.
He failed with Target as everyone realized his short term motives.

JULY 25, 2013 11:47 A.M.

Bob wrote:

Nothing is going to happen unless the SEC steps in. You are they and a person like Bill Ackman, a known short seller, wants you to go after Herbalife. What does this make you look like if you do?

JULY 25, 2013 3:06 P.M.

Some truth wrote:

The person posting as Former Herbalife Leader is either very ignorant or an outright liar. Herbalife doesn't want their distributors putting their products up for auction but the "6,000 ads" he reported are from people selling at a fixed price. Don't confuse "6,000 ads" with the number of distributors. One account alone at ebay has 871 ads listed for Herbalife products. Former Herbalife Leader's claim that they sell the "Herbalife products behind generic advertisements" is laughable. Former Herbalife Leader is obviously a failed distributor.

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Chris Dieterich has covered the U.S. stock market for The Wall Street Journal and Dow Jones Newswires. He is a graduate of Regis University and the Missouri School of Journalism.